Structured
Products Asia Awards 2017: The bank has successfully delivered some innovative,
bespoke instruments to help clients facing renminbi depreciation and a trend
towards deleveraging
Two years
on from China’s dramatic devaluation of its currency in August 2015, the event
continues to cast a long shadow over the foreign exchange market. The 1.9%
downward move, fuelled by the country’s central bank to bolster economic
growth, ushered in a new era of volatility in renminbi that has created
headaches for both corporate hedgers and institutional investors.
“Since
August 2015, renminbi has become much more volatile, and we have seen increased
demand from Chinese exporters to hedge their renminbi cashflows and reduce risk
in the case of further depreciation. Many corporates had previously borrowed in
US dollars and other foreign currencies because the rate was cheaper – but with
the reversal of renminbi, they now need to hedge that liability to avoid
losses,” says Henry Wong, head of forex structuring for the Asia-Pacific region
at BNP Paribas.
The French
bank has sought to tackle these challenges facing Chinese corporates with a
range of unique, bespoke products. These include a euro/renminbi deleverage
target knock-out forward, which deleverages by 20% on the client’s potential
downside every time the product is in the money at the euro/renminbi fixing.
“Renminbi
has been depreciating since 2015, but exporters receiving payments in dollars
or euros don’t want to be completely unhedged. The deleveraging feature of this
product is very effective because the leverage will fall steadily if it remains
in the money, allowing clients to maintain a healthy balance between pick-up
and risk,” says Dickson Law, head of corporate sales for the Asia-Pacific
region at BNP Paribas.
In
addition to the trend towards deleveraging, BNP Paribas has also sought to
cater to a switch from cashflow hedging to liability hedging that has resulted
from the two-way volatility in renminbi. Those Chinese corporates that had
previously issued dollar bonds to benefit from low funding costs may now incur
losses if they had not been hedged against renminbi depreciation, as they have
to buy dollars when the bonds mature.
In this
context, corporates need to put on liability hedges in a flexible,
cost-efficient way, and the bank has structured a dollar/renminbi cancellable
call spread, which is essentially an option with an important cost-reduction
feature. The buyer of the contract would pay a premium on a periodical basis,
but critically has the right to early termination without a penalty charge.
“The
cancellable call spread is a very good fit for corporates that did not hedge
their dollar liabilities prior to August 2015 and now need to find cost-efficient
hedging instruments. The cancellable feature gives them flexibility, so that if
the cost of hedging falls in the future or the market moves and they no longer
need the protection, the buyer can close out,” Wong explains.
Both the
deleverage target knock-out forward and the cancellable call spread are unique
structures that BNP Paribas has developed to meet the specific challenges
facing corporates as a result of recent volatility in renminbi. As such, the
bank has set itself aside from competitors in the region by adapting its
product offering to the changing needs of corporates.
“We have
directly tailored the products to fit the clients’ needs in managing the risk
of euro/renminbi and dollar/renminbi. Clients will often talk to their sales
contacts about the challenges they face, and what is most important is the
subsequent discussion between sales and structuring teams that would result in
a product that directly meets clients’ needs,” says Law.
Meanwhile,
BNP Paribas has proven itself adept at supporting the needs of high-net-worth
individual investors as well as corporates. Pitching the benefits of
diversifying long-term investment portfolios without dramatically changing the
risk-return profile, the bank structured a three-year principal protected
forex-linked certificate with a high coupon to match the high yield on emerging
market bonds.
“If they
invest in forex, our private bank clients typically trade products with short
maturities of six months or one year, but given the market has been fairly
range-bound this year, we advocated using this bond alternative investment to
take a longer-term strategic view, rather than a tactical short-term view. The
forex-linked certificate has been a popular alternative for investors that had
been heavily focused on emerging market debt,” says Ken Tan, head of forex
investor solution sales, wealth management and family offices at BNP Paribas.
Investors
seeking long-term strategic plays have also found value in the bank’s digital basket
certificate, which sought to identify discrete anomalies among highly
correlated currency pairs. Using detailed analysis of economic fundamentals and
in-house currency forecasts, BNP Paribas focused on the themes of a bearish US
dollar against the Indonesian rupiah and Indian rupee, and a bullish US dollar
against the Singapore dollar and Taiwan dollar. With a tenor of two years and a
maximum coupon at maturity of 16%, the basket certificate has proven popular
with investors.
“Currency
basket products typically focus on a common macroeconomic theme, such as
stronger emerging market currency pairs or a stronger dollar, but with our
Asian divergent digital basket certificate, we sought to use the correlation
between the underlying currencies to provide a highly leveraged return. The
product showcases the high degree of customisation that is possible with forex
structured products,” says Wong.
This article
was first published on Risk.net in September 2017